3 Reasons to Buy Pharmacyclics

One of the best-performing stocks in the past few years is one that most investors have probably never heard of. Tiny Pharmacyclics (Nasdaq: PCYC) , with just 77 employees and hardly any revenue, has gone from as low as $0.57 in February 2009 to nearly $60 this week. That's a potential 100-bagger. The chart below shows the company's rise.

As you can see, the company's been on a tear in the last few months, doubling in the last two months, and up more than 300% year to date. The clinical-stage biopharmaceutical company has garnered attention recently for its drug ibrutinib, which is designed to treat blood cancers like non-Hodgkin's lymphoma and chronic lymphocytic leukemia. The drug is currently in the middle of phase 2 trials, and has attracted the support of Johnson & Johnson (NYSE: JNJ) , which has given significant backing. The stock may be risky since the company's put up no meaningful profits, and drug companies are famous at disappointing investors if their product fails to gain regulatory approval. But let's ignore about the naysayers for now and look at three reasons Pharmacyclics is a buy.

Past price appreciationMotley Fool co-founder David Gardner cites past price appreciation as one of his six indicators for finding a rule-breaking, high-growth stock. It's no surprise why. As Newton said, objects in motion tend to stay in motion. Previous price appreciation is one of the best indicators of future stock growth, and while Pharmacyclics may not have the earnings growth that's generally a sign of a rule breaker, it's still taken a number of steps that make it worthy of that appreciation. Those prices increases don't happen in a vacuum.

Recent gains have come as ibrutinib looks more likely to gain approval since nearly all patients have responded favorably to the drug. In February, the company surged from $18 to more than $25 when its earnings report crushed Wall Street estimates. Analysts only expected $0.19-per-share loss on just $2.9 million in revenue, but the drug company's deal with Johnson & Johnson subsidiary Janssen Biotech helped boost those numbers to $0.82 per share in profit and sales of $77.9 million. Shares also about doubled last summer in part due to the company's announcement that the phase 1B/2 trial of ibrutinib was well tolerated and only three out of 83 patients had to discontinue treatment. The path to success had been laid over the last few years.

Credible backingLast December, Pharmacyclics formed its partnership with Janssen Biotech to develop and commercialize ibritunib. The agreement gave Pharmacyclics an upfront payment of $150 million, and potential payments totaling up to $825 million more if development and regulatory milestones are met. The two companies agreed to split development costs 40-60, with Janssen taking the majority, as they plan to launch phase 3 trials over the next several years. Profits and losses will be split evenly.

Though the market responded to the news with a sell-off of Pharmacyclics, this was the first time since 2009 that a health-care company had put up that much money for a drug still in phase 2 trials, a sign that suggests the drug has a greater chance of long-term success than most at this stage.

Backing from a health-care giant like Johnson & Johnson would certainly appear to bode well, and I also like the recent bout of insider buying over the past six months. Over 3% of the float has been purchased by insiders during that time.

The blockbuster effectSome observers have pooh-poohed the fact that a clinical-stage pharmaceutical company has achieved a $4 billion market cap, but If ibrutinib lives up to its potential, the stock will surely go up from here.

For a comparison, Celgene (Nasdaq: CELG) , maker of a similar drug, Revlimid, took in $3.2 billion in revenue from that drug last year. Celgene recently received a setback, however, when it withdrew Revlimid's application for approval in Europe after receiving notice that it would be rejected. That sent shares of Pharamcyclics a few points higher, since many see ibrutinib as a potential competitor to Revlimid.

One analyst cited ibrutibib's "consistently robust clinical activity" in giving the stock a buy rating, and predicted the drug could reach $2.7 billion in sales by 2024.

And no one said this company was just a one-hit wonder. It has several other drugs in the pipeline including a Factor VIIa inhibitor that has completed phase 1 testing, and Abexinostat, another drug for non-Hodgkin's lymphoma, which is in the process of a number of phase 1 and 2 trials.

Foolish takeawayWith phase 3 trials still to come, ibrutinib is far from a lock, but the reasons for growing investor confidence look justified. Our CAPS community remains skeptical, however, giving the company just one star (out of five), with many preferring a wait-and-see approach. The CAPS members argue that even if a payday comes, it still won't happen for several years.

If Pharmacyclics crashes and burns, it won't be the first time that's happened. The stock reached $80 during the tech bubble in 2000 but headed into single digits by 2002. The only certainty with this stock may be that its price won't stay the same for long. You can keep tabs on the company by adding it to My Watchlist, and I'd recommend keeping an eye on any future announcements about clinical trials for ibrutinib, which will likely guide the stock in the years to come

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